Julie Jason: Some last minute retirement plan moves

Published 10:20 pm, Friday, December 21, 2012

While retirement planning is probably low on your "to do" list right now, let's review a few action items that can save you time and money in the long run.

1) Avoid severe tax penalties for failing to take RMDs in 2012.

No matter how old you are, if you inherited an IRA -- whether it's a Roth or a traditional IRA -- you are subject to required minimum distributions (RMDs). These are mandatory withdrawals that must be taken from the inherited IRAs each year. Be sure to review your RMDs now and act on them as soon as possible. Your IRA custodian will need time to handle your withdrawal request before the year comes to a close.

Do the same if you are over age 70½, but with this difference: If you own a Roth IRA, you are not subject to RMDs for the Roth during your lifetime, but your beneficiaries are.

Traditional IRAs and other tax deferred accounts are subject to RMDs, and these withdrawals are taxable (as income). So, be sure to check all of your 2012 withdrawals from your traditional IRAs and other tax deferred accounts to make certain that you met your 2012 RMD requirements.

If in doubt, don't hesitate to contact your IRA custodian on Monday to confirm that you met your 2012 requirements. You'll avoid IRS penalties -- 50 percent of the RMD that you failed to withdraw in 2012 -- if you make the withdrawals before the end of the year.

If you are a sole proprietor or small-business owner and don't have a retirement plan, shame on you. What's stopping you from taking advantage of tax deductions that help fund your retirement savings?

While last minute actions are NOT the best way to go about setting up plans, who doesn't procrastinate? If your business will show profits this year, you may still be able to set up a plan now to reduce your income for 2012. You won't have to fund the plan until 2013.

Also, if you haven't been following developments in retirement plans, you need to be aware that sole proprietors may be able to set aside significantly larger amounts than they might think through 401(k) plans (defined contribution plans) and pension plans (defined benefit plans). These types of plans were much too expensive to set up before the arrival of "solo-401(k)s" and "solo-defined benefit plans" (also called "individual 401(k)s" and "individual defined benefit plans"). That is no longer the case.

Check out the white paper, "A Powerful Tax Strategy for High Income Individuals with Self- Employment Income and Small Business Owners," which you can find at http://tinyurl.com/boumqe4 .

According to Karen Shapiro, CEO of Dedicated Defined Benefit Services, the defined benefit option offers the highest allowable tax deduction on earned income and retirement contributions. Some can deduct and contribute up to $160,000-$200,000 annually, depending on their situation. This type of plan is definitely worth checking out.

3) If your employer provides you with a 401(k) or other contributory plan, double-check your contributions to see if you are taking full advantage of your employer's match. If not, you may still be able to contribute an additional amount of compensation to get the most advantageous match.

4) To open up additional tax planning possibilities, you can estimate your federal tax liability now by using TurboTax TaxCaster 2012, a free online calculator at http://tinyurl.com/47s3jr8. TurboTax produces tax preparation software.

Julie Jason, JD, LLM, award-winning author of "The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad" and "Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad," is principal of Jackson, Grant Investment Advisers of Stamford. Please email her with questions at readers@juliejason.com or write to her c/o The Advocate, 9A Riverbend Drive South, Box 4910, Stamford, CT 06907. Copyright 2012 Julie Jason.